Tea Leaves

8/20/05 Tea Leaves

Henry K. To: "Given that the economic recovery since 2001 has mostly been about the housing industry (including mortgage consulting and financing) and the financial services industry, I would definitely pay heed to the breakdown of both the Philadelphia Bank Index, the recent explosion of insider selling in the financial sector, and the continuing decline in M-3 growth in the United States. Moreover, on a more micro level, the liquidity in both cash and margin accounts are now getting dangerously low - a red flag that is further exacerbated by the amount of leverage now "in the system." It is now not a good time to go long - let alone go long on margin."

American consumers will pay more for orange juice because of a U.S. Commerce Department ruling ordering penalty tariffs of up to 60 percent on orange juice concentrate from Brazil, Brazilian growers said Thursday.

Yesterday, crude oil jumped back to the $65 barrel level. The price of ethylene, a petrochemical that's a key building block in everything from plastics to antifreeze, has jumped 29 percent in the past two weeks. At 44.5 cents per pound, it's just pennies below a five-year high hit last December, according to Bloomberg News data.

For 60 years, truckers could drive for 10 consecutive hours. On Jan. 1, 2004, the Federal Motor Carrier Safety Administration changed the rule to allow them another hour behind the wheel. A federal court, however, threw out the changes. On Friday, the truck-safety agency announced that a revision to the rule would still allow the big rigs to roll for 11 hours, three hours more than safety advocates say they should. The Advocates for Highway and Auto Safety said the Bush administration had simply repackaged an unsafe rule. Studies show the risk of deadly crashes significantly rises after the 10th and 11th hours of driving, said Joan Claybrook, president of the safety group Public Citizen. "Trucks are going to continue to be rolling time bombs on the highway," Claybrook said. "So many drivers are tired, and that's what causes so many crashes." More than a year ago, a federal court struck down the rule, saying it was "arbitrary and capricious" and failed to consider truckers' health. The Bush administration was left to revise it. Just think. The next time the danger level is raised from yellow to orange, it might signify an overtired truck drive on the highway.

North American chip equipment suppliers booked $1.02 billion worth of orders in July, down 36% from a year-ago, trade group SEMI said Friday. That equates to a book-to-bill ratio of 0.93.

Kazakhstan has doubled oil production to 1.2 million barrels per day since the Soviet Union collapsed, putting it in the world's top 20 oil producers. It plans to triple production by 2015 thanks to new oilfields.

Russian President Vladimir Putin called Thursday for an international conference on Iraq by year's end and a timetable for withdrawal of foreign troops from the country, saying they were considered "occupying forces" by many Iraqis. "We deem it necessary to work out a schedule for the staged withdrawal of foreign troops" in Iraq, Putin told reporters following talks with Jordan's King Abdullah II in the Black Sea resort of Sochi.

4400 Northwest Airlines machinists went out on strike.

MCI cut 600 workers in Alpharetta, GA.

As we approach the month of September, one must keep in mind that historically September is the worst month for the Dow with a decline 70% of the time.

The football season will soon officially begin. Frequently, the talk turns to defense, and that has provided impetus to investment pundits to issue a warning for investors to become more defensive in the management of their portfolios. From my perspective, defense begins and ends by buying right and knowing what you are buying. You increase the opportunity to generate profits by buying when the risk/reward ratio is strongly in your favor. There needs to be demonstrated value and adept management. That combination is the best defense. In addition, do not let greed and/or ego enter into a buy or sell decision. Investing is not about you. The stock you buy does not know your name.

Maytag stated that 200 employees at their Newton plant would be cut on Sept. 2 and the workforce at that facility would be reduced to 1,000.

As short-term and long-term rates converge and credit spreads narrow, it will become more difficult for banks to generate positive results. A greater emphasis must be placed on management skills and depth of management. As such, I am suggesting a hedge transaction that may not be to everyone's liking. Wells Fargo has increased the dividend for 18 consecutive years and the return on equity is just below 20%. The bank's market cap is $102.5 billion. The combined market cap for Citigroup, Bank of America, and JP Morgan Chase is $525 billion. I suggest buying 5 shares of WFC and shorting 1 share of C, BAC, and JPM.

Shares of Wal-Mart traded at slightly above $46 in February 2003, April 2005, and on Friday. The last time the stock dipped below $45 was in mid-2002. Unfortunately, when Wal-Mart ads state "everyday low prices," they were not intended to describe the price for its own shares.

A Clearer Picture

8/19/05 A Clearer Picture

Marsoft Incorporated: “After remaining very strong through the first four months of 2005, the dry bulk market weakened significantly from May through July. The decline was broad-based, with spot rates and one-year time charter rates falling by an average of 15-20% during the second quarter. Although this left most rates at levels similar to where they were a year ago, the market slumped further in July, with the Baltic Dry Index falling to its lowest level since April 2003, nearly 6 months prior to the start of the shipping market boom.”

The Financial Times reported that the new issuance of asset-backed securities is on course to top $1 trillion for the first time in 2005 as the number of auto, student, and home equity loans continue to increase. In 2004, total ABS issuance was $896.6 billion, up 53.2% from 2003. Home equity loans grew by 10% in the first half of 2005 and accounted for about 40% of the ABS market during this time period.

According to a study by the Public Policy Institute of California, 20% of home buyers in California plow more than half their monthly income into their mortgages. Affordability rates have dropped to 16% statewide and to 9% in San Diego, according to the CAR. For moderate-income Californians—those earning $30,000 to $60,000—almost a third are spending more than half their income on housing, according to the study. In San Diego, 62% of home buyers opted for interest-only loans in 2004, according to First American/Loan Performance. In my view, there may be isolated pockets in the U.S. where home prices are still rising, but as a generalization, I strongly believe the fizzle is out of the housing market sizzle.

GeorgeOrwell: "In times of universal deceit, telling the truth will be a revolutionary act."

The Philly Fed Index had some interesting points. Despite continued cost pressures, prices for firms’ own manufactured goods were essentially steady in July. Only slightly more firms reported higher prices for their own manufactured goods than reported lower prices, and 78% of the firms indicated steady prices. The current prices received index fell from 12.0 to 3.0, its lowest reading since August 2003. Despite the moderation in the prices received for their own manufactured goods, firms reported higher production costs. Thirty-three percent of firms reported higher inputs costs in July. It should be noted that, going forward, 76% of the manufacturers expect further increases in energy costs, 65% expect price increases for raw materials, and 52% expect increases for intermediate goods. To me, this means lower profit margins, and lower profit margins are a prelude to less hiring and more layoffs.

George Washington: "Guard against the postures of pretended patriotism."

The Conference Board reported that, during the six-month span through July, the leading index increased 1.1%, the coincident index increased 1.1%, and the lagging index rose 1.7%. Ken Goldstein, the Conference Board’s chief economist stated “the leading economic indicators suggest moderate growth into the fall. The spike in energy prices is one factor in this outlook, which mirrors the economic situation in much of the rest of the industrialized world. Of more concern is the level of business and executive confidence. Both investment and hiring intentions reflect a level of caution over both pricing and profit strategies.”

There is a story from AFX News out of Hong Kong that Buffett is considering selling Berkshire’s stake in PetroChina. This rumor has contributed to the sharp decline in PTR stock. However, it does not explain away that, on a relative basis with Chevron, PetroChina’s market cap was way out of line when the shares were at $95 just a short time ago. On a full disclosure basis, I did write Buffett and pointed out PTR’s market cap as well as my view that PKZ was significantly undervalued. I doubt whether he even read my note. With ONGC/Mittal and PetroChina vying for PetroKazakhstan, shares of PKZ have awakened to the tune of 8 points, but I still believe it is a sleeper.

Frequently, bond mavens point out that U.S. Treasuries exceed Japan’s government debt in yield by roughly 2 ¾ percentage points and German debt by 1%. The reasoning goes that this differential in yield accounts in great part for foreigners purchasing our government debt. It might also explain arbitrageurs buying our debt and shorting Japan and Germany. In sum, our 10-year Treasury bonds yielding 4.21% might have little or nothing to do with our country being viewed as a safe haven. A country with twin tower debt exceeding $1 trillion in 2005 is, in my view, a country led by financial misfits. I wouldn’t care if the leaders shoot themselves in the foot, but spare the rest of the innocent taxpayers.

Today's Business Week had a list of 9 oil companies viewed favorably for portfolios. Included were PKZ and Ultra Petroleum.

Crude has rallied above $64 a barrel this morning with a greater focus on the problems in Ecuador.

TRW is closing a plant in Michigan and cutting 400 jobs.

Since we invaded Iraq in March 2003, at least 1,862 U.S. soldiers have died.

Rumsfeld: "Death has a tendency to encourage a depressing view of war."

Good News Bad News

8/18/05 Good News Bad News

8/18/05 Good News Bad News

Yesterday, crude declined $2.83 a barrel to close at $63.25. That’s the good news. With gasoline inventories 12% below last year’s levels, there are concerns about potential shortages. In addition, there are supply disruptions in Ecuador and Nigeria. Petroecuador
stated crude production had fallen 90% to 20,000 barrels. Shell Oil disclosed output disruptions at their flow station in Nigeria. To add a little more to the near-term direction of crude, Bloomberg reported Goldman Sachs Group Inc., the third- biggest U.S. securities firm by market value, raised its oil forecast for next year to $68 a barrel and said crude will stay at about $60 a barrel for years to come. Goldman's projection for New York crude prices for 2006 was boosted from $55 a barrel. The forecast for oil to stay at $60 after that was raised from $45 a barrel because cost uncertainties have delayed investment in new oil projects, according to the Aug. 17 report from the firm's Commodity Research analysts, including Steve Strongin and Jeffrey Currie.

Keep believing the figures on how great the employment picture is. Keep believing that Wal-Mart does not provide a decent wage and decent benefits. More than 11,000 people applied for 400 jobs at the company’s new 148,000 square foot store in Oakland, CA.

Keep believing that things are getting better in Iraq. More than 60 U.S. troops have been killed in Iraq this month.

The Wall Street Journal stated that Tommy Hilfinger is preparing to auction itself in the coming weeks. I hope the auction goes better than Hilfinger’s reality show. If you blinked, you missed it.

Barry Ritholtz: “Without energy, the SPX year-over-year quarterly earnings gains are a pathetic 4%.” The bulls had better root for Goldman Sachs’ new oil price projection to be correct. Of course, there is a downside to higher oil prices, such as, the PPI rising 1% in July. For math mavens, that’s an annual rate of 12% or surely enough for the Fed to continue raising rates high enough for the yield curve to invert.

According to the Economic Policy Institute, real hourly earnings fell in all but two out of the last 15 months. In fact, they reported that the real hourly wages of the workforce remain at almost the exact level as when the economic recovery began in November 2001. They stated “in July 2005 dollars, the wage was $16.15 in November 2001 but only $16.13 last month.” That being so, it is no wonder that we have reached the tipping point on housing prices as well as consumer spending. Those betting on a favorable Christmas season are in for an unwelcome surprise.

China will stop the alumina and iron alloy processing trade from August 22.The move is aimed at curbing exports of alumina and iron alloy which are high energy consuming products. According to the National Development and Reform Commission, China has already banned some iron and steel product exports, canceled export rebates of some products, and reduced the export rebate of steel and coal. The move will help control the processing of products that demand high energy consumption, high pollution and resources.

Trade between Iran and China came to some $7 billion in 2004, up 25 percent from $5.6 billion the previous year, with commercial exchanges projected to reach $10 billion a year by the end of 2010, according to Tehran's Iran-China Chamber of Commerce.
By comparison, Finance Ministry figures show Japan's trade with Iran came to 1.01 trillion yen in 2004, up just 2.3 percent from 991.3 billion yen in 2003.

Yesterday there was good news and bad news. For those long commodities and U.S. treasury bonds, you experienced some costly blows. For those long the dollar, you munched on a ham sandwich. For me, I lunched and heaved. That’s better than never having entered the ring. For those who can’t take a punch, I suggest you stay at the beach.

Michael Althsuler: “The bad news is time flies. The good news is you're the pilot.”

Real Earnings, Inflation, And PKZ

8/17/05 Real Earnings, Inflation, And PKZ

Real average weekly earnings fell by 0.2 percent from June to July after
seasonal adjustment, according to preliminary data released today by the Bureau
of Labor Statistics of the U.S. Department of Labor.  A 0.4 percent increase in
average hourly earnings was more than offset by a 0.6 percent increase in the
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Average weekly hours were unchanged. Data on average weekly earnings are collected from the payroll reports of
private nonfarm establishments.  Earnings of both full-time and part-time
workers holding production or nonsupervisory jobs are included.  Real average
weekly earnings are calculated by adjusting earnings in current dollars for
changes in the CPI-W.Average weekly earnings rose by 2.7 percent, seasonally adjusted, from July
2004 to July 2005. After deflation by the CPI-W, average weekly earnings
decreased by 0.5 percent.

On a seasonally adjusted basis, the CPI-U, which was unchanged in
June, increased 0.5 percent in July. Energy costs advanced sharply,
increasing 3.8 percent in July after falling 0.5 percent in June.  Within
energy, the index for petroleum-based energy rose 6.1 percent in July,
accounting for over one-half of the increase in the overall CPI.  Energy
services increased 1.1 percent.  The index for food increased 0.2 percent
in July.  The index for fruits and vegetables, which fell 1.2 percent in
June, increased 1.6 percent in July.  The index for all items less food
and energy increased 0.1 percent for the third consecutive month.  A
decline in new vehicle prices--down 1.0 percent in July--was more than
offset by increases in the indexes for airline fares and for lodging away
from home.

The tale of 2 economies: China's industrial output grew 16.4 per cent during
the first half of this year and the gross domestic product grew 9.5 per cent.
U.S. industrial production in July rose a slim 0.1% with capacity utilization
standing at 79.7%. With excess capacity, why should corporations build new plants
in the U.S.?

U.S. companies may have to pay an average of 12.6 percent more for
their employees' health insurance next year, according to a survey by
benefits consultant Hewitt Associates.The rates are for HMOs,plans that
provide for privately insures Americans.In response, 40 percent of employers are proposing to shift more medical costs to
workers in the form of higher deductibles and a larger share of
premiums, according to the Hewitt survey. Overall, employers' health care costs have doubled since 1998 to about
$7,600 a worker this year and may reach $8,000 in 2006, said Ron
Fontanetta, a principal at benefits consulting firm Towers Perrin.

Home sales in the Bay Area stepped back from the record territory of recent months, a real estate information service reported Tuesday. The number of homes and condos sold in July in the nine-county region dropped 11.9 percent to 11,470 from 13,014 for June. That was down 10.8 percent from 12,862 for July last year, according to DataQuick Information Systems. The median price paid for a Bay Area home was $606,000. That was down 0.7 percent from $610,000 in June, and up 17.9 percent from $514,000 for July a year ago. The biggest year-to-year decline in sales was in San Francisco, down 21 percent to $637,000 but the median price there rose 19.4 percent to $776,000. Sales in San Mateo county dropped 18.3 percent to $806,000where the median price was up 17.5 percent to $759,000.

PKZ currently accounts for 12% of the oil output from Kazakhstan, where about 3.3% of the world's oil reserves are located. In the case of Unocal, I frequently mentioned that the highest bid would not be the winning bid. In the case of PKZ, I believe the wnning bid will be the highest bid. There is much discussion that India and China will sign an agreement by year-end. This agreement would be a collaboration involving both countries when bidding for petroleum assets. The case of PKZ is quite different. This involves ONGC Videsh bidding with Mittal. It is not bidding alone as a country identity. I am quite sure that Goldman Sachs, as advisor to PKZ, recognizes the difference and the firm will seek out the best price for PKZ shareholders. With crude continuing to trade around $66 a barrel, PKZ's reserves have become increasingly valuable in 2005. There should be increased awareness that Kazakhstan has enormous potential for natural resources.

I would like to reinforce a statement I made a few weeks ago. The new pipeline carrying PKZ oil to China will save $7 a barrel in transportation costs. Based on proven oil reserves, that savings works out to $3.85 billion or $52 a share. You might want to read what PetroChina stated today about bidding for PKZ: "One of our key strategies is to focus on oil and gas assets that are closer to home because of China's oil needs,' a source at PetroChina was quoted as saying. "We plan to transport the oil through the China-Kazakhstan pipeline to our refinery in Dushanzi in Xinjiang in northwest China," the source added.

The average price of gasoline at the pump has risen to $2.52 a gallon, and records have been set daily since August 8.

Iran's oil revenues from exports are expected to reach a record $43 billion in 2005.

A nationwide poll released today by the John J. Heldrich Center for Workforce Development at Rutgers University revealed that nearly 7 in 10 workers plan to stay on the job past retirement age-- including a growing number who say the decision will be driven by financial need. In 2000, 82% stated they would be finally able to retire by 65. In the newest survey, the number has dropped to 63%. In addition, 28% of boomers stated they plan to work part-time in retirement because of a need for money.

The VIX Index is beginning to wake up. It rose 10% yesterday and is up about 36% from its low. Traders often believe that the summer means a dull market with low volatility. Keep an eye on Iran. Volatility might be very much alive and well.

Have you ever considered going long lumber and shorting copper? Even though stockpiles of copper are at a 9-month high, copper is selling for a record $3,660 a ton.

The market cap for HP is about $73 billion. Dell's is roughly $89 billion. Hopefully, they will get to the same point. That would be, in my view, a sameness bringing forth uncommon value.

Volumes of mortgage applications rose 2.2% in the week ended Aug. 12 compared to the prior week.

India has received 1,312 applications for patent of pharmaceutical products, becoming only the second country after the U.S. to get a large number such requests.

Fifty-three metropolitan areas representing 31% of the total U.S. housing market are considered extremely overvalued and confront a high risk of future price corrections, according to study conducted by National City Corp. The study determines a market extremely overvalued if prices are 30% above where the study estimates they should be based on historic price data, area income, mortgage rates and population density.

Dan Scheinman, Cisco's Sr. VP for corporate development: "We came to India for the costs, we stayed for the quality, and we're now investing for the innovation."

Lifelines

8/16/05 Lifelines

The Baku-Tbilisi-Ceyhan pipeline passing via Turkey is scheduled to start carrying Azeri crude this Autumn with a capacity set to rise to one million barrels a day by the end of the decade. There are also plans to link this pipeline to the oil fields in Kazakhstan with a new pipeline.

A recent report released by the Shanghai Academy of Social Sciences (SASS) points out that the country's crude oil reserves will be exhausted within 14 years, based on the current proven oil reserve and scale of production. However an energy expert with the State Information Center told Interfax that the estimation is too pessimistic. China has a total national oil reserve standing at 2.38b tons. If the country continues to produces 180-200m tons every year, current reserves will be exhausted within 14 years, said the SASS report. "The proven oil reserve figure will definitely rise with the development of technology, and therefore, the reserves cannot be exhausted so quickly, " Niu Li, an energy expert with the Economic Prediction Center of the State Information Center, told Interfax. Niu added that reserves usually rise more quickly than actual production rates. Niu also said that the country may find more resources in the East China Sea and Xinjiang in the intervening years. "However, rapid economic growth will lead the country to import even more crude from the global market in the near future," said Niu. 68% of the 390 Chinese cities that rely on local mineral reserves to sustain their economies are in the "mature production stage" while another 12% are facing depletion. The Daqing Oilfield, the country's largest, produced 50m tons of oil per annum for 27 years in a row until 2004, but there are plans to allow output to fall by 40% by 2010, reaching only 30m tons per year. China's annual crude demand is expected to rise by 9.7% to 318m tons this year, suggesting that the country will need to import 135m tons this year, accounting for 42.45% of total demand and exceeding last year's figure of 40.5%, said a recent report by the Development Research Center under the State Council. The country's daily oil demand is predicted to reach 9.3m barrels by 2010, increasing by 37% from 2005, the Deutsche Bank predicted.

The NAHB-Wells Fargo housing market index slipped to 67 in August from 70 in July. It's the lowest level since April. "Builders still remain upbeat and confident," said Dave Wilson, president of the NAHB and a builder from Ketchum, Idaho." The index for current sales dropped to 72 from 76, the lowest in more than a year. The index for buyers' traffic fell to 50 from 55, matching the April low. The index for future sales remained at 77.

The Treasury Department reported U.S. June foreign capital inflows of $71.2 billion, up from $55.8 billion in May. A close look at the inflows for the first six months of 2005 give me an uneasy feeling. Those with the jack are not giving us their savings. Japan provided $21 billion and China provided $49 billion, but the UK gave us $120 billion and the remainder of Europe a total of $80 billion. In other words, those that could least afford it, provided the most. That does not speak well for the future.

Jack Benny: "I went to a meeting for premature ejaculation. I left early."

Singapore retail sales rose 9.4 percent in June from a year earlier, according to a report issued Monday,

After yesterday's close on the New York Stock Exchange, PKZ put out the following statement:
"PetroKazakhstan Inc. (the"Company") in response to market rumors and as requested by the Toronto StockExchange announces that it has received proposals to acquire all outstanding common shares of the Company pursuant to the process announced in its June 27, 2005 news release.The Company is in the process of assessing these proposals and expects that further discussions with interested parties will continue." In my view, the bidding for PKZ has taken on a very dynamic turn. I never gave much of a chance for India's ONGC to come out on top. However, ONGC's bid was made jointly with Lakshmi Mittal, majority owner of Mittal Steel, the world's largest steel company. He has a long history of doing business in central Asia and is responsible for much of the economic revival in this region. His presence in the bidding process changes the landscape considerably. For a PKZ shareholder, the news of the joint bid with Mittal is terrific news. The joint bid of China National Petroleum and PetroChina can no longer be considered the runaway favorite. There will be stiff competition, and, in my view, the bidding could go higher than I had previously envisioned. In any event, the eventual buyer will be getting an excellent long-term value, and one which is not fully appreciated. Both bidders understand the political climate, and I do not envision this aspect to be a problem. One point has been overlooked by many investors. Kazakhstan's 39.6 billion barrels of oil reserves at the end of 2004 were 35 percent greater than the U.S. total, according to data compiled by BP Plc.

For the first seven months of 2005, the CSFB/Fremont Hedge Fund Index climbed 3.29%.

Delta Airlines is selling its Atlantic Southwest Airlines for $425 in cash to SkyWest. The company stated yesterday that it isn't likely to get further debt financing because of its low credit rating and already-pledged assets and its operating cash flow won't be enough to meet the company's liquidity needs for the rest of the year.

John M. Berry on the Federal budget deficit: " Assuming current laws were unchanged, as the CBO is required to do, the cumulative budget deficit was projected to be about $2.1 trillion for the coming 10 years. Using some more realistic assumptions about extending expiring tax cuts, increases in discretionary spending and gradually reducing the military costs of fighting in Iraq and Afghanistan, the total would be more than double that amount."

In the January-July period, Kazakhstan's industrial output grew 5.1% year-on-year.

The EU pledged its support for Iran becoming the main transit route for central Asian oil and gas--- in exchange for a freeze on Tehran's nuclear program. The Iranian government rejected the proposal.

Yesterday's N.Y. Post article on Dow Jones caused quite a stir. The article did not cite any specific sources but still stated that some younger members of the Bancroft family, Dow Jones' controlling shareholder, are considering placing the company up for sale. The stock rose to $41+. In May, the stock sold at a yearly low of approximately $32. This month, members of the Bancroft family sold 99,000 shares in various transactions. With a market cap of almost $3.5 billion and selling at a stiff multiple of projected cash flow, at these levels I'll let the speculators risk their money.

Canadian premiers and territorial leaders signed a resolution calling on Ottawa to take all necessary measures to recover softwood duties and force Washington to respect the ruling under NAFTA that would have ended punitive duties on Canadian softwood lumber. Nafta panels have concluded on three occasions that the U.S. failed to prove that Canadian softwood poses a material threat of injury to .S. producers. Quebec Premier Jean Charest stated "this last ruling brings us to a tipping point. This issue contaminates other trade issues." British Columbia Premier Gordon Campbell stated "it's hard for us to see how you can build a long-term relationship in any kind of trade if the Americans aren't willing to live up to their obligations." The Bush administration is doing an excellent job of alienating our trading partners. It will not be long before we look in the mirror and realize our nation is without friends.

Teddy Roosevelt: "The President is merely the most important among a large number of public servants. He should be supported or opposed exactly to the degree which is warranted by his good conduct or bad conduct, his efficiency or inefficiency in rendering loyal, able, and disinterested service to the Nation as a whole. Therefore it is absolutely necessary that there should be full liberty to tell the truth about his acts, and this means that it is exactly necessary to blame him when he does wrong as to praise him when he does right. Any other attitude in an American citizen is both base and servile. To announce that there must be no criticism of the President, or that we are to stand by the President, right or wrong, is not only unpatriotic and servile, but is morally treasonable to the American public. Nothing but the truth should be spoken about him or any one else. But it is even more important to tell the truth, pleasant or unpleasant, about him than about any one else."

According to the AP, drivers in the southern province of Guangdong were waiting for hours for gas in lines up to a kilometer (a half-mile) long, sometimes leaving with empty tanks when supplies ran out, state media reports said. In the southern city of Shenzhen, which borders Hong Kong, more than half of all gas stations closed Monday as shortages worsened, the Hong Kong-based newspaper South China Morning Post reported Tuesday. Meanwhile, crude prices dipped to $65.50 a barrel this morning.

Wal-Mart Stores, Inc reported record second quarter sales and earnings for the
quarter ended July 31, 2005.  Net sales were $76.8 billion, an increase of
10.2 percent over the second quarter of fiscal 2005.  Net income for the
quarter was $2.8 billion, an increase of 5.8 percent from $2.7 billion in the
second quarter of fiscal 2005.  Earnings per share were $0.67, up from
$0.62 per share in the same prior year quarter. Net income for the six months ended
July 31, 2005 was favorably impacted by two items totaling $145 million after
tax or $0.03 per share:  an increase due to favorable tax resolutions of $77
million and positive legal developments of $68 million after-tax.
Lee Scott, President and CEO, said, "I am proud that the hard work of our
associates allowed us to report another record quarter.  Early in the quarter,
our results were disappointing; however, July came in stronger than expected.
Wal-Mart Stores did miss their plan as our customer continues to be impacted
by higher gas prices and it is difficult to improve our expense leverage in
the current environment." The company forecasts earnings per share for
the third quarter to be between $0.55 to $0.59, and for the year, the forecast is
$2.63 to $2.70 per share. To reach the upper end of the range, comp sales will need
to remain in the 4% growth area.

How have these high gas prices hurt consumer spending?
If the average car owner drives 12,000 miles a year and uses 600 gallons of gas
a year, the current high price of gas (being 67 cents a gallon higher than
this time last year) costs that driver about $8 more a week. With home prices having
risen substantially over the last few years, that $8 pales by comparison.

Jay London: "They asked me what I thought about euthanasia. I said I'm more
concerned about the adults."

Monday Musings

8/15/05 Monday Musings

Time spent in Chapter 11 can mean hemorrhaging money. In this year’s second quarter, UAL Corp. reported spending $1.4 billion on reorganization.

China’s July industrial production rose 16.1%.

As some of the troubled refiners return operationally, the crude market has cooled somewhat with prices drifting back towards the $66 per barrel level. Meanwhile, over this weekend, prices at the pump averaged $2.50 per gallon nationally.

Lowe’s expects to open a total of 150 stores this year with annual sales growth of 17% and an earnings per share range of $3.31 to $3.37. Lowe’s, like Walgreen’s, remains a choice for long-term investors. The stock rarely looks undervalued, but the annual consistency makes up for any valuation questions.

It is quite amazing that so few investors know much about Kazakhstan. This Republic, with 15 million people living in an area almost 4 times the size of Texas, is the largest of the former Soviet republics in territory, excluding Russia. It borders the Aral Sea and the Caspian Sea, and is rich in natural resources, such as, major deposits of petroleum, natural gas, coal, iron ore, and manganese.

Agilent unveiled a restructuring designed to cut 1,300 jobs and lower costs by $450 million, under which it will sell its chip unit for $2.66 billion and spin off two other businesses.

Work on a pipeline designed to transport natural gas from the Caspian region and the Middle East to the European Union (EU) has begun, a Romanian newspaper reported Friday.

China's second-biggest steelmaker, Anshan Iron and Steel Group, said today that it has merged with smaller competitor Benxi Iron and Steel Group, creating a rival for the nation's No. 1 steelmaker, Baosteel. China is the world’s biggest steel producer. It consumes about one-third of global steel output.

The President of India Dr APJ Abdul Kalam suggested that the Oil and Natural Gas Company(ONGC) should jump into the production of the alternative sources of energy and should make India an independent energy country by the year 2030. He hoped that ONGC would become a global energy giant in the years to come.

The average forecast for the July CPI is a rise of 0.4%. The government will emphasize the inflation rate ex food and energy. This implies that filling up your car with $2.50 a gallon gas is not materially different than it was in July 2004. If you believe that, then you probably believe we invaded Iraq over WMD. Is there any reason to believe that inflation has not invaded your household’s cash flow? Many say inflation is a hidden tax. I don’t find it so hidden. If there is inflation, and if you believe inflation will continue into at least the near-term future, then there is no justification for the spread between 2-year and 10-year Treasury bonds being a mere 21 basis points. That, to me, is an accident waiting to happen. Others probably disagree. Time will tell the real story.

Trends In The Making

8/14/05 Trends In The Making

The yen had its biggest weekly gain against the dollar since January.

Over this weekend, it has been reported that Delta Airlines is seeking bankruptcy financing from GE and others.

Josiah Royce: “Unless you can find some sort of loyalty, you cannot find unity and peace in your active being.”

According to the National Association of Realtors' statistics, 960,000 condos sold this year as of June, 12.4 percent, more than in all of 2004 and up 46.1 percent from all of 2002. The average condo price was $223,500 in June, up 14.8 percent from last year and 57.1 percent from three years ago.

Paul Krugman: “These days, Americans make a living selling each other houses, paid for with money borrowed from the Chinese."

Last year, foreign nationals earned almost 60% of American engineering doctorates. According to Engineering Trends, the U.S. ranked 16th per capita in the number of doctoral candidates and 25th in engineering undergraduates per million citizens.

On July 2, the "Joint Statement of the People's Republic of China and the Russian Federation Regarding the International Order of the 21st Century" sent a message to Washington stating that "the peoples of all countries should be allowed to decide the affairs of their own countries, and world affairs should be decided through dialogue and consultation on a multilateral and collective basis. The international community should thoroughly renounce the mentality of confrontation and alignment, should not pursue the right to monopolize or dominate world affairs, and should not divide countries into a leading camp and a subordinate camp..."

With regard to Iran, Bush stated he is keeping “all options open.” Russia and China have supplied Iran with arms, and stand ready to support that nation militarily. Both have kept all their options open. Hopefully, this will remain simply a war of words.

P.J. O’Rourke: “War is a great asshole magnet.”

Sol Palha: “Lumber prices topped out in July 2004 (over 1 year ago), experienced a sharp correction and then attempted to rally again but failed to take out their July 2004 highs. In contrast the Housing index (which is more or less a reflection of the housing markets) continued to rally and put in a new high in July exactly 12 months after the lumber market topped. This is a huge form of inter market negative divergence in action.”

As long as the yearly money supply growth exceeds GDP growth by 50 to 100%, the future path of the dollar will be down. There are too many dollars placed in circulation looking for a home, and there are too many alternative and available places for countries like China to park their growing hoard of free cash flow.

P.J. O’Rourke: "Every government is a parliament of whores. The trouble is, in a democracy, the whores are us."

In the past, I have discussed the Baltic Dry Index (BDI), a worldwide compilation of rates to book cargoes of raw materials on shipping routes around the globe. The index does not count ships carrying finished goods. From spring 2004 towards the end of 2004, a blow-off move carried the index from roughly 2650 to 6250. It has since plunged to roughly 2000. Only 3 years ago, the index stood at 1000. The real estate market is tame compared to the BDI. If expectations for future worldwide GDP growth were rosy, the BDI would not be in a funk.

Terence ( Publius Terentius Afer): “When the mind is in a state of uncertainty, the smallest impulse directs it to either side.”

The National Guard and Reserve have suffered more combat deaths in Iraq during the first 2 weeks of August than in any full month of the entire war.